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As Foreclosure Rates Rise, So Does Fraud

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By Ralph Roberts

RISMEDIA, August 31, 2007–Turn on the news or visit your favorite news Web site, and you are likely to see a report about the foreclosure epidemic. The reports you are not likely to see, however, are about something that is closely related and equally if not more disturbing-real estate and mortgage fraud. As foreclosure rates rise, so does fraud. And as the incidence of fraud rises, foreclosure rates follow. It is as vicious a cycle as any economist has ever witnessed.

Which came first is a chicken-and-egg scenario that I do not want to get into. Sometimes rampant fraud can trigger foreclosures. I am currently involved in the investigation of such a case in Detroit. In a classic cash-back-at-closing scheme, a builder who was having trouble selling his homes managed to find someone to pay nearly $800,000 for a home with a true market value of no more than about $550,000, scamming the lender out of over $250,000 in cash.

A homeowner in the same subdivision contacted me to report her suspicions when she noticed two of the builder’s homes across the street in bad need of some TLC. They were without lawns, window dressings, and furniture. Apparently once the buyers purchased the homes and “earned” their cut of the ill-gotten proceeds, they simply neglected or even abandoned the homes. The homeowner who contacted me was concerned that housing values in her subdivision would drop as a result. And her concern is a very valid one.

Real estate and mortgage fraud can turn a beautiful neighborhood into a ghost town.
Increases in foreclosure rates also trigger rising rates of fraud. This happens for several reasons. One is that builders and homeowners who are having trouble selling their homes in a depressed market often search for ways to give buyers extra incentives-such as cash back at closing. A homeowner may agree to sell their home for tens or even hundreds of thousands of dollars more than the home is worth and then kick back the surplus to the buyer, just to unload the home. Builders have been know to do the same thing, offering cash, free upgrades, furniture, and even vacations and cars as enticements to buy… all of which are financed by lenders who are fooled into approving loans in excess of the property’s true market value.

Another reason why rising foreclosure rates trigger fraud is that con artists have more tools to work with in the form of bargain properties. They can purchase rundown REO (Real Estate Owned or repossessed homes) from banks at bargain basement prices, do some cosmetic renovations, order an inflated appraisal, and either refinance the home or sell it for significantly more than its true market value to an unsuspecting buyer (illegally flipping the home). In many cases, the illegal flipper recruits people who are financially strapped to go along with the deal. Eventually, the buyers cannot afford the monthly payments, default on the loan, and lose the home in foreclosure. That same home can then be used again in another scam.

To fix the problem with rising foreclosure rates, we need to wage a two-pronged attack that helps homeowners steer clear of the foreclosure trap while shutting down the perpetrators of real estate and mortgage fraud.

Ralph Roberts is a real estate fraud expert and activist and co-author of “Protect Yourself from Real Estate and Mortgage Fraud: Preserving the American Dream of Homeownership” (Kaplan, August 2007). Visit www.FlippingFrenzy.com or contact Ralph at: RalphRoberts@ralphroberts.com or 586.751.0000.

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